9/8/2017

The Contract, the Law, and the Courts

Determining the enforceability of indemnity agreements is a three-step process

By Robert Usinger , Barry Temkin

The enforcement of indemnity agreements can be difficult to predict, as it requires a three-part analysis. In each case, there must be an analysis of the individual language of the indemnity agreement, the relevant statute, and prior case precedents interpreting indemnity contracts.

Both New York and New Jersey have anti-indemnity statutes restricting the extent to which a party can be indemnified for its own negligence. Under New Jersey law, an indemnification agreement will not be enforced when it requires indemnification for the indemnitee’s sole negligence pursuant to NJSA 2A 40-1.

New York’s General Obligations Law §5-322.1 prohibits enforcement of an indemnification agreement for damage arising “out of bodily injuries to persons or damage to property contributed to, caused by, or resulting from the negligence of the promisee, his agents or employees, or indemnitee, whether such negligence be in whole or in part….” Under §5-324 of the General Obligations Law, New York also prohibits enforcement of an indemnity contract in favor of an architect, engineer, or surveyor for personal injury or bodily damage “caused by or arising out of defects in maps, plans, designs or specifications, prepared, acquired, or used by such architect, engineer, surveyor….” The public policy behind the New York General Obligations Law is to prevent downstream pressure on subcontractors to indemnify owners and general contractors for their own negligence.

While New York’s anti-indemnity statutes generally prohibit indemnitees from contracting away their own negligence, there are exceptions, depending on the contractual language.

Judicial Decisions

While acknowledging that every contract is unique and should be interpreted pursuant to its own specific language, courts have carefully scrutinized indemnity agreements in light of the statutory language, the public policy against indemnifying a party for its own negligence, and the general legal principle that a contract, particularly an indemnity contract, should be narrowly construed against its drafter.

Thus, in Itri Brick & Concrete Corp v. Aetna Casualty & Surety Company, the New York State Court of Appeals held that an indemnity clause could not be enforced by a contractor whose negligence partially caused a personal injury since the specific language at issue contemplated full indemnification, thereby running afoul of the New York General Obligations Law. In Mantilla v. NC Mall Associates, the New Jersey Supreme Court similarly ruled that an indemnitee was not entitled to indemnification for its own negligence unless such an intention is expressed in clear and unequivocal contractual terms.

However, there is a line of authorities finding that an indemnity agreement may be enforced where it clearly and unequivocally requires indemnification for the indemnitee’s own negligence, and the indemnitee’s negligence is not the sole cause of the damage. For example, in Dorsey v. Cobblestone Village Equities, a New Jersey court enforced an indemnification clause—in favor of the owner of a strip mall against a snow and ice contractor—that provided for indemnification “from and against any loss, cost, damage, or expense, by reason of any liability for damage because of bodily injuries…sustained by any person…arising out of, or on account of, or in consequence of the performance of this contract, whether or not such injuries or persons…are due to…any negligence of [the owner]…, excepting from the foregoing the sole and complete negligence of [the owner].” Since the accident was not caused entirely by the owner’s sole negligence, the indemnity was enforced.

In another New Jersey case (Leitao v. Damon G. Douglas Co.), the Appellate Division affirmed an order granting contractual indemnification in favor of an indemnitee who was found to be 51 percent negligent.

Similarly, New York courts have held that, to the extent the terms of an indemnification agreement are sufficiently broad and explicit, indemnification may be permitted even though the injury to the plaintiff was caused, in part, by the active negligence of the party seeking indemnification. For example, the New York Court of Appeals, in Brooks v. Judlau Contracting Inc., permitted an indemnitee to recover, to the extent that it was not itself negligent, under an indemnity contract that provided for indemnification “to the fullest extent permitted by law.”

According to Judge Ciparick in the Brooks case, “[T]he statute does permit a partially negligent general contractor to seek contractual indemnification from its subcontractor so long as the indemnification provision does not purport to indemnify the general contractor for its own negligence.” As such, the Court of Appeals found that “the provision is enforceable and does not violate General Obligations Law Section 5-322.1.”

So how do indemnity contracts affect the indemnitor’s insurance carrier? A contractual obligation to indemnify by one party does not carry that obligation over to the indemnitor’s professional liability insurer unless such coverage has been previously bound. It is very common, though erroneous, for the beneficiary of the indemnification agreement to attempt to notice a claim to the indemnitor’s professional liability carrier under the notion that it is an additional insured. However, unless that indemnitee has been specifically added as an additional insured, it is simply not covered by the indemnitor’s insurance policy. An insured is obviously free to agree to any contract or indemnification endorsement it may desire, but it cannot place that burden on an insurer that is completely unaware of the additional risk and had not considered it during the underwriting process.

Strategic Takeaways

Several strategic takeaways are in order for litigants and their insurance carriers:

Look at the contracts. While this may seem basic, defense counsel and insurance claims professionals should, upon opening a new file, always look to ascertain the existence of an indemnity agreement. Sometimes these agreements appear in unlikely places, such as noted in fine print or on the back of a purchase order, or even on a professional’s web page. Sometimes a purchase order incorporates by reference the fine print in its terms and conditions, which could, in turn, be incorporated by reference from a completely different document or web page. It is important that such provisions be ascertained at the onset of a case.

Tender promptly. A prompt tender at the onset of a case is important. A court could find that a party delayed in seeking indemnity and deny indemnification simply on that basis. Similarly, parties should assert cross-claims and third-party claims against other potential indemnitors early in the case.

Look for choice of law issues. For those cases in which there is an indemnity contract, don’t assume that the law of the forum state, or even the law where the construction project took place, applies. Sometimes, more sophisticated parties have choice of law provisions that could tilt the analysis one way or the other depending on the law of the different jurisdictions.

Analyze your industry. The outcome in your case could be determined by whether or not the contract is deemed one for construction. For example, the New Jersey and New York anti-indemnity statutes are specific to construction contracts. If counsel can establish that the underlying accident or damage did not take place in a construction context, indemnification may be more readily available.

Look for common-law indemnity. Even in situations where there is no contractual indemnity, or the promise is unenforceable, common law indemnity may be available, and could, in some circumstances, be significantly broader than the contractual obligation. For example, New York has a concept of implied equitable indemnity available to parties that are partially negligent, provided that the proposed indemnitee’s negligence is disproportionately greater. According to the New York Court of Appeals, in Mas v. Two Bridges Assocs. by Nat. Kinney Corp., common-law indemnification may be “appropriate because of a separate duty owed the indemnitee by the indemnitor (thus the indemnitee may recover for the wrong to it), because there is ‘a great difference’ in the gravity in the fault of the two tortfeasors, or because the duties owed to the injured plaintiffs in causing injury are disproportionate.”

Undertake periodic contract reviews. A contractor should periodically review the language in its indemnity agreements to ensure that it is compliant with the relevant case law and, accordingly, enforceable.

Finally, if you believe you are an additional insured under a professional liability policy, ask to see proof of this.

Indemnification provisions are complex and varied, and must be parsed according to the language of each individual contract. These contracts must be analyzed in light of the relevant jurisdiction, including various state statutes that may proscribe or limit indemnification for the indemnitee’s own negligence. Even in situations in which contractual indemnification is not available, an indemnitee may still be able to benefit from an insurance clause that obligates the indemnitor to procure insurance naming the indemnitee as an additional named insured. Counsel should carefully look at the facts of each case, as there is no statutory impediment to indemnification in situations where the indemnitee is truly free from fault.



Robert J. Usinger is an assistant vice president at OneBeacon Insurance in New York. He can be reached at RUsinger@onebeacon.com.

Barry R. Temkin is a partner at Mound Cotton Wollan & Greengrass LLP in New York. He can be reached at BTemkin@moundcotton.com.

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